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It’s not always easy to discern a market mood, but the investor vibe plainly shifted over the summer of 2023. The recession obsession faded while prospects for a soft landing improved.

On balance we share that optimism. Inflation has fallen significantly. The labor market has cooled just enough to reduce wage pressure on companies while also tempting idle workers back to the office. Two economic game changers – artificial intelligence (AI) and industrial policy – are supporting investment and growth.

Here, we tell the current macroeconomic and market story in a series of charts, explaining why we believe now is a great time to be invested, for both the short term and the long term.

The macro backdrop: Resilient growth, fading inflation

Not too long ago, many prominent economists believed inflation could not fall without a material rise in unemployment. However, this seems to be exactly what is happening. Headline inflation has dropped to 3% on a year-over-year basis even as the U.S. economy has added an average of over 150,000 jobs a month over the past three months and the unemployment rate has hovered near a 70-year low.1

How is this possible?

First, we are finally starting to emerge into a post-pandemic normal for the economy. Supply chains have cleared, and consumer spending no longer reflects the impact of stimulus checks and public health policy. Perhaps most importantly, the supply of workers is on the rise. In fact, the employment-to-population ratio (for prime age workers ages 25-54) has finally recovered to where it was in the late 1990s and early 2000s.

Growth has been resilient as supply and demand have come into better balance. In fact, most estimates for third-quarter GDP are predicting an annual growth rate of 3%, higher than what most economists think is the trend growth rate of the economy.2

Inflation is falling while the labor market is solid and growth is strong

The chart on the left shows U.S. headline CPI and Core CPI together

Source (left): Haver Analytics. Data as of July 31, 2023. Source (middle): Haver Analytics. Data as of July 1, 2023. Source (right): Federal Reserve Bank of Atlanta. Data as of August 31, 2023.

What’s more, the elements for sustainable growth look to be in place. We don’t see many signs of the imbalances that tend to exacerbate recessions. Inflation might have played that role, but the trajectory for consumer prices now looks much more benign. In addition, the Federal Reserve probably does not need to work as hard to ensure that inflation continues to decline. We think its rate hiking campaign, which presented a powerful headwind to markets, is likely over.

The investment landscape: The search for yield is over

Amid a global rise in interest rates, income-seeking investors don’t have to look very far: Across the fixed income landscape, we see increasing opportunities for 5%+ annual yields. This is important because one of the best indicators of future returns for fixed income is the starting yield.

Consider: The worst five-year forward return from this starting point in yields for one- to 17-year municipal bonds is 3.9% annualized. Higher starting yields also limit the downside. For one- to 17-year municipals, you still break even over one year if yields rise by 80 basis points (bps).3

Why not just stay in cash? (We hear this question a lot.) For one, those short-term yields won’t last forever. Yields will likely be lower one year from now when you need to reinvest. Also, the value of cash and short-term fixed income investments would likely not benefit if rates declined, while they could for longer-term fixed income.

Of course, everyone needs to hold cash, and it feels good to earn some income. But we think it makes sense to consider locking in today’s higher yields for a little bit longer by taking some steps out of cash.

Higher yields are currently offered across different types of fixed income investments

annualized yield across assets, %

Sources: Bloomberg Finance L.P., Cliffwater Direct Lending Index.
Data as of: 10Y UST, Euro IG, 3M US T-Bill, US IG, US Munis, Euro HY, US HY, US Preferreds, 6M CD as of August 31, 2023; Direct Lending as of June 31, 2023. Past performance is no guarantee of future returns.

Equities: On the way to new highs

Resilient growth and subsiding inflation powered the first leg of this year’s 15%+ global stock rally. From here, we expect earnings growth to drive equity markets to new highs over the next six to 12 months. An approximate 10% return in equities is almost double what you are getting from Treasury bills (with better tax treatment), and we see potential for even higher returns over the medium term.4

Two potent forces – the growing use of AI and deployment of industrial policy – could propel stock markets higher. As more and more businesses use AI to improve efficiencies, companies that produce the chips powering AI technology stand to gain. (Year-to-date, one of those companies, Nvidia, is the top performer in the S&P 500.)5 Similarly, industrial companies will likely benefit from fiscal policies that incentivize investment in new manufacturing systems, clean technology and a wide range of infrastructure projects. These trends will endure over many years, we believe, delivering critical support to equity markets.

Industrial policy is a game changer for US manufacturers

The chart on the left shows the number of mentions of the word "AI" in S&P 500 earnings calls

Sources (left): FactSet, Bloomberg Finance L.P. Data as of August 31, 2023. Sources (right): Haver Analytics, Bloomberg Finance L.P. Data as of July 30, 2023, August 31, 2023.

Multi-asset portfolios: The best of both worlds

We expect solid returns from both stocks and bonds over the next six to 12 months. Once again, a multi-asset investment portfolio can work in different economic scenarios. For example, if growth slows to recessionary levels, interest rates will likely fall and bond prices could rise. This would help to offset equity market declines that would occur because of the earnings slowdown.

On the other hand, if inflation remains tame and growth resilient, it could provide a “goldilocks” environment for both stocks and bonds. Falling interest rates would boost bond prices, while decent growth would help corporate earnings.

We don’t need to look too far back in history to see what a powerful combination that could be. In 2019, the Federal Reserve lowered interest rates by 75 bps. The S&P 500 returned about 30%, while the U.S. Aggregate Bond Index earned nearly 9%. It may not be the most likely outcome for the next 12 months, but it is certainly a reasonable bull case.6

In sum: Against a backdrop of resilient growth and fading inflation, we find reasons for continued optimism across a range of markets – and see no investor vibe shift on the horizon.



Bloomberg Finance L.P., Haver Analytics. Data as of September 14, 2023.


Bloomberg Finance L.P., Federal Reserve Bank of Atlanta. Data as of August 31, 2023.



Past performance is not indicative of future results



Bloomberg Finance L.P. Data as of September 14, 2023. Past performance is not indicative of future results. It is not possible to invest directly in an index.


FactSet. Data as of September 14, 2023.


Bloomberg Finance L.P. Data as of September 14, 2023

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All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context. Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar-denominated, investment-grade debt. The index is part of the S&P AggregateTM Bond Index family and includes U.S. treasuries, quasi-governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non-U.S. debentures, covered bonds, and residential mortgage pass-throughs.

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